Jennifer Dowty
Jennifer Dowty, Chartered Financial Analyst, writes exclusively for Globe Unlimited subscribers. The Before the Bell report is updated throughout the premarket to reflect latest developments.
Good Friday morning to you.
Weak Chinese economic data continue to weigh on global markets as the S&P/TSX composite index looks to end the week off on a negative note. The volatility and downdraft is still not over with more pain to expected to hit investors today with North American futures in negative territory suggesting that equity markets will open lower.
On Thursday, the S&P/TSX composite index fell nearly 300 points, or 2.1 per cent, and is now down six per cent, year-to-date. There were 192 stocks down in the Index, with just 53 stocks closing higher, and two stocks that were unchanged.
Gold stocks were safe havens that have benefited from the market volatility. The price of gold rallied nearly $20 (U.S.) to close at $1,152 an ounce. Among the stocks with positive technical breakout yesterday were Exchange Income (Ticker: EIF), Romarco Minerals (Ticker: R), Silver Standard (Ticker: SSO), Torex Gold (Ticker: TXG), Alacer Gold (Ticker: ASR), BMO Mid Federal Bond Index ETF (Ticker: ZFM) and BMO Short Federal Bond Index ETF (Ticker: ZFS)
The economic slowdown in China is raising global market volatility and last night, China reported yet more weaker-than-expected economic data. Chinese August Manufacturing Purchasing Managers' Index (PMI) had a reading of 47.1, below expectations of 48.2, and below the July reading of 47.8. China's manufacturing sector was characterized by weak domestic and export demand. As a result, the Shanghai Stock Exchange composite index closed down 4.3 per cent, and the Shenzhen Stock Exchange composite index fell by 5.4 per cent as the market volatility and declines continued.
In Japan, manufacturing PMI rose to 51.9 from 51.2 in July, a positive report. Domestic orders were strong; however, export demand was weak. Concerns about the impact of a slowing Chinese economy sent the Nikkei 225 down three per cent.
Major European markets are down by over a per cent despite better-than-expected August manufacturing PMI reports reported in the Euro zone and from Germany. Euro zone August manufacturing PMI was reported at 52.4, unchanged from July but ahead of expectations of 52.2. German manufacturing PMI was 53.2, up from 51.8 reported last month, and beating forecasts of 51.6.
In other European news, Alexis Tsipras resigned from his post as the Greek Prime Minister and will take let the people to decide in an upcoming election if he should be re-elected stating, "I feel the deep moral and political obligation to put in your own judgment everything I did." An election is anticipated to occur next month.
On Friday, Canada's July inflation was up 1.3 per cent year over year compared to a 1 per cent gain in June, and slightly shy of analyst expectations. Core inflation, which strips out volatile items and is closely watched by the Bank of Canada, rose to 2.4 per cent from 2.3 per cent, as forecast.
Canadian June retail sales rose faster than forecast. Total sales increased 0.6 per cent from the previous month to a record $43.2-billion, Statistics Canada said Friday. Economists had expected a 0.2-per-cent increase.
Here's the bottom line. The S&P/TSX composite index is now down over 11 per cent since April 15, and the weakness remains intact. Buyers are not stepping into this market and rightfully so. I have been calling for a pullback in equity markets for quite some time and we are in the midst of it right now. The S&P/TSX composite index broke through the 14,000 level on Thursday and major U.S. indices, the S&P 500 Index and the Dow Jones industrial average now have negative year-to-date returns. The next technical support level is for the S&P/TSX composite index is at 13,700, and failing that 13,500.
Will there be further weakness? - likely yes. Will this be a buying opportunity for longer-term investors? – likely yes. Excluding commodity stocks, which I continue to recommend investors avoid, there will be stocks that surface as buying opportunities. For instance, I am closely watching shares of Cineplex and waiting for this stock to pullback further. This company has industry leadership, offers a sustainable yield of over three per cent, has a catalyst with a strong movie release slate in the fourth-quarter with movies such as Star Wars, the Hunger Games, the latest James Bond film hitting the silver screen.
While this correction is painful and investors will be opening their August financial statements and seeing an erosion in their portfolio values, this sell-off will create attractive buying opportunities for longer-term investors. Stick with domestically focused stocks with strong fundamentals. I would continue to avoid resources stocks as well as stocks with significant exposure to Alberta's economy. Markets may continue to drift lower, but I believe we will see positive performance in stocks as we exit the year. Be patient and wait for the market correction to play out.
The key things to watch for next week will be the earnings parade of Canadian banks with the Bank of Montreal kicking off the third-quarter bank earnings season on Tuesday. As well, there may be more U.S. Federal Reserve noise as the Federal Reserve's vice chairman, Stanley Fischer, will be speaking at the U.S. Federal Reserve's Jackson Hole conference on Aug. 29. Earlier this month, the Fed vice chairman made dovish comments, highlighting the risk of raising rates when inflation is very low.
Now, here is a closer look at major markets and news.
MARKET DATA:
Futures
S&P 500 -0.42 per cent; Dow -0.64 per cent; Nasdaq: -0.69 per cent
Equities
Hong Kong's Hang Seng -1.53 per cent
Shanghai composite index -4.27 per cent
Japan's Nikkei -2.98 per cent
London's FTSE 100 -1.43 per cent
Germany's DAX -1.22 per cent
France's CAC 40 -1.35 per cent
Stoxx 600 -1.46 per cent
Commodities
WTI crude oil (Nymex Oct) -0.77 per cent at $40.98 (U.S.) a barrel
Gold (Comex Dec) +0.11 per cent at $1,154.50 (U.S.) an ounce
Copper (Comex Dec) -0.78 per cent at $2.30 (U.S.) a pound
Currencies
Canadian dollar at 76.49 (U.S.), -0.0002
U.S. dollar index -0.58 at 95.41
Bonds
U.S. 10-year Treasury yield 2.08 per cent, -0.045
ECONOMIC INDICATORS:
(8:30 a.m. ET) Canada consumer price index for July. Consensus is an increase of 0.2 per cent from June and 1.4 per cent year over year. For core CPI, consensus is an increase of 0.1 per cent June and 2.5 per cent year over year.
(8:30 a.m. ET) Canada retail sales for June. Consensus is an increase of 0.3 per cent from May. Excluding automobiles, the consensus is a rise of 0.6 per cent
STOCKS TO WATCH:
Baytex Energy Corp. announced it will suspend its monthly dividend, as it revealed a reduced capital program and updated guidance for this year.
DBRS downgraded Enbridge Inc. debt ratings and assigned a stable outlook. The move was related to Enbridge's planned drop-down of assets to its Canadian affiliate, as well as plans to hike its common share dividend and offer a debt swap.
Bombardier's battered shares could get another lift Friday after the transportation company said Thursday that its CSeries commercial aircraft in on track for certification this year.
Deere & Co. on Friday reported fiscal third-quarter profit of $511.6 million, or $1.53 per share. The results surpassed Wall Street expectations of $1.47 per share. The agricultural equipment manufacturer posted revenue of $6.84 billion in the period, which fell short of Street forecasts of $7.11 billion.
Athletic footwear retailer Foot Locker Inc. reported Friday a fiscal second-quarter profit that rose to $119 million, or 84 cents a share, from $92 million, or 63 cents a share, in the same period a year ago. Sales for the quarter ended Aug. 1 increased 3.3% to $1.7 billion. Both earnings per share and sales beat analyst expectations.
Skechers USA Inc. said Friday its board has approved a 3-for-1 stock split of its Class A and Class B common stock that will be conducted in the form of a stock dividend.
Hewlett-Packard reported adjusted quarterly profit of 88 cents per share, 3 cents above estimates. But revenue was slightly below forecasts, with slumping personal computer sales continuing to weigh on results.
Gap earned an adjusted 64 cents per share for its latest quarter, matching estimates, with revenue also essentially in line with expectations.
FedEx said it would formally launch a $4.8-billion for Dutch delivery company TNT Express on Monday. The company also said it is confident that the deal will win regulatory approval, two years after regulators blocked an attempt by UPS to buy TNT.
Salesforce beat estimates by two cents with adjusted quarterly profit of 19 cents per share, with revenue slightly exceeding forecasts.
ANALYST ACTIONS:
Canaccord Genuity upgraded Rubicon Minerals from "hold" to "speculative buy."
Mizuho Securities maintained a "neutral" rating on Hewlett-Packard, but cut the price target to $30 (U.S.) from $38 after the company's third quarter earnings per share came in above expectations.
Berkshire Hathaway Inc. was raised to "Buy" from "Hold" at Edward Jones.
Sleep Country Canada Holdings Inc. was rated new "Buy" at TD Securities. The 12-month target price is $17 (Canadian) per share.
QUOTE OF THE DAY:
"The conventional view serves to protect us from the painful job of thinking." John Kenneth Galbraith
Jennifer Dowty